Indiana law has few protections for people who purchase a house with land contract, a shortcoming that consumer and housing advocates say places vulnerable buyers at risk.

Still, the approach is attractive and increasingly common among individuals and families unable to obtain tradition financing, according to Amy Nelson, executive director of the Fair Housing Center of Central Indiana. That’s because buyers often can get into a contract with little or no money down, followed by affordable monthly payments over a set number of years.

The gamble is whether the buyer, often financially distressed to begin with, will have the money or be able to obtain a loan when the balloon pay-off comes due. If they can’t — and default — the property reverts to the seller. The buyer walks away with nothing. There is no equity for the money they have paid the seller or improvements that were made.(1)

Land contracts have been used for decades by individuals selling their homes or land. But recently, Nelson said, they are being used more often by businesses that sell homes in large-scale variations on rent-to-own deals. For instance, an IndyStar investigation found one such seller, Chart Properties LLC, has issued more than 100 contracts to buy and sell homes in a process that is not covered by Indiana’s real estate licensing law.

Nelson said there should be a cap on how many homes a person or business can sell via contracts without a real estate license, which is required in Indiana to sell property a seller does not own

“I would hope that maybe … once you are doing so many transactions a year that you would switch from being that mom-and-pop selling your own home, moving and trying to do it yourself, versus somebody who is in the business of so-called selling those homes,” she said.

Chart President Robert “Bob” Keck explained to IndyStar that he does not need a real estate license because Chart claims ownership of homes it is buying on contract. He said Chart’s attorneys have thoroughly researched their legal standing and the company also has a supporting opinion issued in by the Indiana Attorney General.

With a growing number of people purchasing homes via contracts — without the protections that come with transactions regulated by real estate licensure laws and mortgages — Nelson said the message is “buyer beware.”

“The central problem with these land installment contract is that they exist in this no-man’s land in between where the potential home buyer has none of the protections of home ownership and none of the protections of being a tenant in a traditional lease,”(2) said Sarah Bolling Mancini, of counsel to the National Consumer Law Center and co-author of a 2016 report that called contract sales “toxic” and “predatory.”

(1) While there may not be any statute in Indiana addressing this point, the Indiana case law makes abundantly clear that, except in limited circumstances (for two examples: in the case of an abandoning, absconding vendee; where the vendee has acquired very little, if any, equity in the property), a sale of real estate on a land contract is treated as an outright sale and purchase, with the payments due on the land contract being treated as payments on an equitable mortgage; and upon default, there is no automatic forfeiture of the property, but rather, the remedy for the seller is to bring a foreclosure action in the same way a traditional mortgage lender forecloses on a mortgage, with the buyer having a corresponding right of redemption.

[U]nder a typical conditional land contract, the vendor retains legal title until the total contract price is paid by the vendee. Payments are generally made in periodic installments. Legal title does not vest in the vendee until the contract terms are satisfied, but equitable title vests in the vendee at the time the contract is consummated. When the parties enter into the contract, all incidents of ownership accrue to the vendee. Thompson v. Norton (1860), 14 Ind. 187. The vendee assumes the risk of loss and is the recipient of all appreciation in value. Thompson, supra. The vendee, as equitable owner, is responsible for taxes. Stark v. Kreyling (1934), 207 Ind. 128, 188 N.E. 680. The vendee has a sufficient interest in land so that upon sale of that interest, he holds a vendor's lien. Baldwin v. Siddons (1910), 46 Ind. App. 313, 90 N.E. 1055, 92 N.E. 349.

This Court has held, consistent with the above notions of equitable ownership, that a land contract, once consummated constitutes a present sale and purchase. The vendor "`has, in effect, exchanged his property for the unconditional obligation of the vendee, the performance of which is secured by the retention of the legal title.'" Stark v. Kreyling, supra, 207 Ind. at 135, 188 N.E. at 682. The Court, in effect, views a conditional land contract as a sale with a security interest in the form of legal title reserved by the vendor. Conceptually, therefore, the retention of the title by the vendor is the same as reserving a lien or mortgage. Realistically, vendor-vendee should be viewed as mortgagee-mortgagor. To conceive of the relationship in different terms is to pay homage to form over substance. See Principles of Equity, Clark, 4th edition, Sec. 9, p. 23.

The piercing of the transparent distinction between a land contract and a mortgage is not a phenomenon without precedent. In addition to the Stark case, supra, there is an abundance of case law from other jurisdictions which lends credence to the position that a land sales contract is in essence a mortgage: [...]

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It is also interesting to note that the drafters of the Uniform Commercial Code abandoned the distinction between a conditional sale and a security interest. Section 1-201 of the UCC (IC 1971, XX-X-X-XXX (Ind. Ann. Stat. § 19-1-201 [1964 Repl.])) defines "security interest" as "an interest in personal property or fixtures which secures payment or performance of an obligation ... retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer is limited in effect to a reservation of `security interest.'" We can conceive of no rational reason why conditional sales of real estate should be treated any differently.[1]

A conditional land contract in effect creates a vendor's lien in the property to secure the unpaid balance owed under the contract. This lien is closely analogous to a mortgage — in fact, the vendor is commonly referred to as an "equitable mortgagee." D.S.B. Johnston Land Co. v. Whipple, supra; Harris v. Halverson, supra. In view of this characterization of the vendor as a lienholder, it is only logical that such a lien be enforced through foreclosure proceedings. Such a lien "[has] all the incidents of a mortgage" (D.S.B. Johnston Land Co. v. Whipple, supra, 234 N.W. at 61), one of which is the right to foreclose.

There is a multitude of cases upholding the vendor's right to foreclose. (See 77 A.L.R. 276, and the cases cited therein.) The remedy is most often referred to as a foreclosure of an executory contract. (A land contract is "executory" until legal title is actually transferred to the vendee.) A 1924 New York case best describes this remedy:

"Out of the nature of the relationship created by a land contract, where the vendee is in possession, there have developed certain equitable remedies, among which is the right of the vendor in a proper case to sell out the interest of the vendee for the purpose of satisfying his lien under the contract, in case of default, and while it seems a misnomer, for convenience this remedy is spoken of as foreclosure, and the action as one to foreclose the contract. 3 Pomeroy's Equity Jurisprudence (4th Ed.) 3046, § 1262." Conners v. Winans (1924), 122 Misc. 824, 204 N.Y.S. 142, 145.

See also, Keller v. Lewis (1878), 53 Cal. 113, for another excellent characterization.The foreclosure of a land sale contract is undeniably comprehended by our Trial Rules. TR. 69(C) IC 1971, 34-5-1-1, deals with the foreclosure of liens upon real estate:

"Unless otherwise ordered by the court, judicial foreclosure of all liens upon real estate shall be conducted under the same rules and the sale procedures applicable to foreclosure of mortgages upon real estate, including without limitation redemption rights, manner and notice of sale, appointment of a receiver, execution of deed to purchaser and without valuation and appraisement. Judicial lien foreclosures including mortgage foreclosures may be held at any reasonable place stated in the notice of sale. In all cases where a foreclosure or execution sale of realty is not confirmed by the court, the sheriff or other officer conducting the sale shall make a record of his actions therein in his return to be filed promptly with the record of the case and also in the execution docket maintained in the office of the clerk." (Emphasis added.)

The vendor's interest clearly constitutes a "lien upon real estate" and should, therefore, be treated as one. The basic foreclosure statute — that is for mortgages executed after July 1, 1957 — provides for a six-month period of redemption, commencing with the filing of the complaint. Additionally, it establishes the procedures attendant to the foreclosure sale. The statute reads as follows:

"Mortgages executed after July 1, 1957 — Time of issuing execution — Sale — Notices. — In any proceeding for the foreclosure of any mortgage hereafter executed on real estate, no process shall issue for the execution of any such judgment or decree of sale for a period of six [6] months after the filing of a complaint in any such proceeding: Provided, That such period shall be twelve [12] months in any such proceeding for the foreclosure of any mortgage executed prior to July 1, 1957. Thereafter, upon the filing of a praecipe therefor by any judgment creditor in said proceeding a copy of the judgment and decree shall be issued and certified by the clerk under the seal of the court, to the sheriff, who shall thereupon proceed to sell the mortgage premises or so much thereof as may be necessary to satisfy the judgment, interest and costs, at public auction at the door of the courthouse of the county in which said real estate is situated, by advertising the same by publication once each week for three [3] successive weeks in a daily or weekly newspaper of general circulation printed in the English language and published in the county where the real estate is situated, the first of which publications shall be made at least thirty [30] days before the date of sale; and by posting written or printed notices thereof in at least three [3] public places in the township in which the real estate is situated, and at the door of the courthouse of the county: Provided, That if the sheriff be unable to procure the publication of such notice within such county he may dispense with such publication but he shall in his return state his inability to procure such publication and the reason therefor. [Acts 1931, ch. 90, § 1, p. 257; 1957, ch. 220, § 1, p. 476.]"

IC 1971, XX-X-XX-X (Ind. Ann. Stat. § 3-1801 (1968 Repl.]).

TR 69(C) requires that the procedures outlined in the above statute be applied "without limitation" to the "judicial foreclosure of all liens upon real estate." We believe there to be great wisdom in requiring judicial foreclosure of land contracts pursuant to the mortgage statute. Perhaps the most attractive aspect of judicial foreclosure is the period of redemption, during which time the vendee may redeem his interest, possibly through re-financing.

Forfeiture is closely akin to strict foreclosure — a remedy developed by the English courts which did not contemplate the equity of redemption. American jurisdictions, including Indiana, have, for the most part, rejected strict foreclosure in favor of foreclosure by judicial sale:

"The doctrine of strict foreclosure developed in England at a time when real property had, to a great extent, a fixed value; the vastly different conditions in this country, in this respect, led our courts to introduce modifications to the English rules of foreclosure. Generally, in consonance with equity's treatment of a mortgage as essentially a security for the payment of the debt, foreclosure by judicial sale supplanted strict foreclosure as the more equitable mode of effectuating the mutual rights of the mortgagor and mortgagee; and there is at the present time, in the majority of the American states, no strict foreclosure as developed by the English courts — either at law or in equity — by which a mortgagee can be adjudgd absolute owner of the mortgaged property. The remedy of the mortgagee is by an action for the sale of the mortgaged premises and an application of the proceeds of such sale to the mortgage debt, and although usually called an action to foreclose, it is totally different in its character and results from a strict foreclosure. The phrase `foreclosure of a mortgage' has acquired, in general, a different meaning from that which it originally bore under the English practice and the common law imported here from England. In this country, the modern meaning of the term `foreclosure' denotes an equitable proceeding for the enforcement of a lien against property in satisfaction of a debt."

55 Am.Jur.2d, Mortgages, § 549 (1971).

Guided by the above principles we are compelled to conclude that judicial foreclosure of a land sale contract is in consonance with the notions of equity developed in American jurisprudence. A forfeiture — like a strict foreclosure at common law — is often offensive to our concepts of justice and inimical to the principles of equity.

This is not to suggest that a forfeiture is an inappropriate remedy for the breach of all land contracts. In the case of an abandoning, absconding vendee, forfeiture is a logical and equitable remedy.

Forfeiture would also be appropriate where the vendee has paid a minimal amount on the contract at the time of default and seeks to retain possession while the vendor is paying taxes, insurance, and other upkeep in order to preserve the premises. Of course, in this latter situation, the vendee will have acquired very little, if any, equity in the property. However, a court of equity must always approach forfeitures with great caution, being forever aware of the possibility of inequitable dispossession of property and exorbitant monetary loss. We are persuaded that forfeiture may only be appropriate under circumstances in which it is found to be consonant with notions of fairness and justice under the law.

In other words, we are holding a conditional land sales contract to be in the nature of a secured transaction, the provisions of which are subject to all proper and just remedies at law and in equity.

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